Few, if any, economies and equity markets outside of the United States command attention on par with China. So it is noteworthy that U.S.-listed China exchange-traded funds have recently been rebounding.
For example, the iShares FTSE/Xinhua China 25 Index (ETF) (NYSE:FXI), the largest China ETF trading in New York, is up 7.6 percent over the past month.
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Underscoring the intensity of the recent decline endured by Chinese stocks, FXI is still down 10 percent over the past 90 days. For most of this year, the only large emerging market that has, at the very best, looked not so bad by comparison is India, not China. Still, China's efforts to drive a more consumption-focused economy could benefit select ETFs trading in the United States.
China Exposed ETF
The WisdomTree China ex-State-Owned Enterprises Fund (WisdomTree Trust (NASDAQ: CXSE)) could prove to be an improved way of accessing China's new-look economy.
The WisdomTree China ex-State-Owned Enterprises Fund debuted in mid-June, replacing the WisdomTree China Dividend ex-Financials Fund as the latest emerging markets ETF to overtly avoid state-owned enterprises (SOEs).
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So a key question for U.S. investors is how well the Chinese navigate their current transition from an investment-led economy to one in which consumer spending plays a greater role in future growth. One window into that transition is credit growth, specifically lending activity that fuels household consumption. A look inside Chinas latest total social financing (TSF) data presents a useful summary of credit formation in the worlds second largest economy, said WisdomTree Chief Investment Officer Luciano Siracusano in a note out Monday.
CXSE: Trading Thin, But Rising
Though it is currently thinly traded, CXSE has impressed in recent weeks, climbing 7.1 percent over the past month. Excluding state-controlled companies means the ETF is predictably light on energy names, but it still features a 19.1 percent allocation to the financial services sector, its third-largest sector weight.
CXSE's financial services exposure could prove advantageous as that sector's health improves in China and Chinese credit growth contracts.
Net-net, this is likely a positive for the transparency and regulation of the Chinese banking system. Corporate bond issuance posted another strong reading of 288 billion RMB in August. That represented 49 percent growth versus the same time last year. The issuance of corporate bonds by Chinese companies is also an encouraging signal.
It suggests a better mix of credit formation may be developing in China, which may help to reduce the concentration risk of the overall credit system, added Siracusano.
By excluding SOEs, CXSE is, not surprisingly, highly levered to the Chinese consumer and the country's burgeoning Internet and technology industries. Technology and consumer discretionary stocks combine for over 61.6 percent of the ETF's weight. One familiar name could hold the keys to CXSE's near-term fortunes. Downtrodden Alibaba Group Holding Ltd (NYSE:BABA) is CXSE's largest holding at a weight of almost 16.6 percent.
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